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Vanguard Total Bond Market ETF Is Among the Best

This fund’s low costs and broad scope should help it outperform over the long term, says Morningstar’s analyst.

Vanguard Total Bond Market ETF BND is a well-constructed portfolio of investment-grade U.S.-dollar-denominated bonds. The fund’s broad scope and low fee should allow it to outperform its Morningstar Category peers over the long run. The fund’s more-expensive investor (VBMFX) and admiral (VBTLX) share classes earn Morningstar Analyst Ratings of Bronze and Silver, respectively, while the rest of the share classes receive Gold ratings.

The fund tracks the Bloomberg U.S. Aggregate Float Adjusted Index, which captures investment-grade, fixed-rate, taxable U.S. bonds. The index has different minimum size requirements for each type of bond. While it captures a broad swath of the bond market, the index excludes certain types, such as inflation-linked bonds, non-ERISA-eligible commercial mortgage-backed securities, and bonds with equity features such as convertibles and warrants. It weights selected holdings by market cap, reducing the par amount outstanding for bonds held by the Federal Reserve to account for float.

This weighting scheme tilts the fund toward the largest issuers, resulting in an overweighting in U.S. Treasuries relative to category peers. The fund tends to park around 40% of its assets in these instruments. Its float adjustments also steer it away from agency MBS compared with the Bloomberg U.S. Aggregate Bond Index, its non-float-adjusted counterpart, and its category peers. Still, this sector takes up around 20% of its assets, the third-largest sector in the fund after Treasuries and corporate bonds.

The fund has historically been overweight in the highest rung of the investment-grade space. As of May 2022, it parked around 70% of its assets in AAA rated issues, versus the category average of 50%. This results in a more-conservative risk profile than most of its peers, which can help its performance during credit shocks. For instance, the fund offered superior protection during both the 2008 global financial crisis and the March 2020 coronavirus-driven drawdown. However, the fund may lag peers when credit risk pays off, such as during the latter half of 2020. Its active peers can take advantage of riskier assets and find better yields in these environments.

The main source of the fund's risk comes from its interest-rate sensitivity. As it captures the broad market, the fund's composition depends on issuance activities, which have tilted toward bonds with longer maturities in recent years. As of May 2022, the fund's effective duration was around 6.7 years, which was slightly higher than its average peer's. As a result, the fund tends to lag its peers when interest rates rise. Overall, its broad scope and low fee should provide a performance edge over category peers in the long run.

Key Proprietary Morningstar Metrics for Vanguard Total Bond Market ETF

Morningstar Analyst Rating: Gold Process Pillar: Above Average People Pillar: Above Average Parent Pillar: High

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The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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